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Why unleashing competition would deliver lower fares and greater choice to rail passengers

    This article was initially published in City AM on 9th January 2017

    The UK’s rail passengers are suffering, and will no doubt continue to do so over the coming months. Union action is bringing the network to a standstill, with further strikes planned for this week. The level of sickness leave among train staff has also been mysteriously increasing, and has doubled compared to pre-strike levels, according to Southern Rail.

    Network Rail, which is responsible for the maintenance of the UK’s railways, has been failing passengers too. It is estimated that around 60 per cent of delays on Southern Rail were due to network problems with track and signalling in 2015.

    Network Rail’s performance needs to be dramatically improved, and the transport secretary Chris Grayling is right to indicate that the organisation will no longer maintain its monopoly infrastructure role for the UK’s railways.

    However, while the issues of strike action and Network Rail’s failings are important, a deeper problem with the UK’s railways is the near absence of on track competition. Competition on the UK’s passenger railways occurs in the bidding stage for franchise contracts. With a handful of exceptions, after this process, competition effectively ceases.

    Since the privatisation of the railways, successive governments have been resistant to open access competition on passenger routes. Open access operators (OAOs) are train companies that secure track access agreements for individual routes and are not subject to franchising agreements.

    The Department for Transport is often concerned that OAOs will pose a risk to the revenue streams of franchisees, which would in turn reduce the payments to the government for funding the network. This goes some way towards explaining why the Office for Road and Rail only approved four out of 19 open access proposals from 2000 to 2014.

    However, the government’s resistance to open access on the UK’s railways is ill judged. The Competition and Markets Authority (CMA) recently called for there to be a significantly greater role for open access on intercity long distance routes, and for good reason. Passengers are seeing a huge benefit on the East Coast Mainline where OAOs operate and compete.

    According to the CMA, First Hull Trains and Grand Central – which are the two OAOs on the East Coast Main Line (ECML) – had a 94 per cent satisfaction rate for passengers in 2015, which is the joint highest score across all operators. This was reconfirmed in the 2016 Passenger Satisfaction survey. Furthermore, fares in areas of the line where the franchise holder competes with OAOs are more competitive compared to areas of the line that face no competition.

    And it is also notable that open access does not appear to be affecting the franchisee’s revenue streams. In fact, the ORR’s statistics show that the franchise premium to the government was £205m in 2015-16.

    There are signs of progress. In 2015, there was an additional open access application accepted for a route from London to Blackpool. And an open access bid by Alliance Rail has been submitted to run services that would call at Southampton, Eastleigh, Basingstoke and Hook, before heading to London. This route would not directly compete with any of the services that are run by Southern Rail, but this is – in any case – an interesting proposal given that no open access has been permitted south of the River Thames since privatisation. Some on track competition may finally be given the go ahead.

    It is disappointing that the government – unlike the CMA – has yet to formally declare its support for the principle of open access on the UK’s railways despite warm words in the recent past.

    The government should publicly support the principle of open access competition, which could benefit passengers with more choice and lower fares. There is also a very strong case for introducing a review of the current “not primarily abstractive test” to see whether changes are required to encourage and deliver more open access.

    More on track competition may not, of course, be appropriate for high density commuter lines. However, there is great potential to boost competition and productivity far more on long distance routes, and the new application by Alliance Rail for an open access service from London to Southampton is very encouraging.

    The CMA was right to call for greater on track competition on long distance routes. For the sake of passengers, it is time for the government to follow through and act.

    Daniel joined the Centre for Policy Studies as Head of Economic Research in November 2015. He was promoted to Deputy Director in March 2017. Prior to joining the CPS, he worked in research roles for a number of parliamentarians. Daniel left the CPS in March 2018.

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